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Vol. 15, No. 51 Week of December 19, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Buccaneer expands plan

Arctic OCS would kill RZFB funding; AIDEA still interested in investment

Eric Lidji

For Petroleum News

Buccaneer Energy wants to expand its business plan for Alaska to include the Arctic outer continental shelf, a move that would open the doors to more drilling opportunities for the company, but also jeopardizes a major source of project funding.

The Australian independent is trying to purchase a jack-up rig for use in Alaska. The company originally planned to use the rig only in Cook Inlet, but on Dec. 14 announced that it would be expanding its business plan to allow the rig to be used in the Chukchi and Beaufort seas, either as a primary rig or as a relief rig.

When Buccaneer announced its program back in November, it said it had identified at least five years worth of drilling work for the rig in Cook Inlet, ranging from exploration wells to infill drilling to well completions for both independents and majors.

The new plan essentially allows Buccaneer, through its subsidiary Kenai Offshore Ventures, to compete for most offshore projects planned anywhere in Alaska. However, it also takes away a funding source previously considered central to Buccaneer’s business model for acquiring and mobilizing the jack-up rig: Recovery Zone Facility Bonds.

Buccaneer previously applied to receive up to $60 million in these tax-exempt private activity bonds, created by the American Recovery and Reinvestment Act of 2009.

The bonds are meant to spur economic activity in distressed areas. Because the Kenai Peninsula Borough, the local government entity in the Cook Inlet area, is considered a Recovery Zone under the definition of the federal program, Buccaneer’s project to buy a jack-up rig to drill wells in the Cook Inlet qualified for Recovery Zone Facility Bonds.

However, because the federally owned Arctic OCS is not a Recovery Zone, Buccaneer would not be able to use the bonds to buy a rig for use in the Chukchi or Beaufort Seas.

In a prepared statement, Buccaneer said it was looking at alternative forms of funding to replace the Recovery Zone Facility Bonds, or RZFBs. “The tax exempt advantage of the RZFBs is not a major consideration in the investment decision with the difference in costs associated with using non tax exempt debt not being material,” Buccaneer wrote.

Under federal guidelines, the bonds must be issued by the end of the year.

OCS opportunities and risks

Containing among the largest undeveloped discoveries in northern Alaska, the Chukchi and Beaufort seas are major priorities for companies like ConocoPhillips, Shell and Statoil, but development has been slowed by technical, commercial and regulatory challenges.

The Beaufort and Chukchi present an opportunity for a rig operator like Kenai Offshore Ventures, especially if the federal government requires relief wells at drill sites.

In April, ConocoPhillips told Petroleum News that it planned to use a jack-up rig for its Chukchi Sea exploration program starting in 2012, but declined to say whether it would consider bringing the rig to Alaska earlier to lease out to Cook Inlet operators. (The 2012 date has slipped to 2013, ConocoPhillips said Dec. 15, “assuming lease status is resolved,” an issue in front of the courts.)

Shell already owns a drill ship for its planned Beaufort Sea and Chukchi Sea programs.

In addition to the business potential for a rig operator, the Arctic OCS also presents numerous environmental, regulatory and commercial risks.

The Arctic OCS is among the harshest physical environments in the world — icy, offshore and remote. Even before BP’s Gulf of Mexico oil spill upended offshore drilling, environmental groups challenged Arctic exploration. Unlike most of Cook Inlet, which is mainly regulated by the same state and local governments that want to increase natural gas production for public policy reasons, the Arctic OCS is under federal oversight.

Due diligence on proposal

Buccaneer originally planned to finance its program using both the $60 million in Recovery Zone Facility Bonds, as well as a $20 million to $30 million investment it requested from the Alaska Industrial Development and Export Authority.

AIDEA is a public corporation of the state of Alaska, and is also the state agency responsible for administering the Recovery Zone Facility Bond program in Alaska.

AIDEA recently hired two contractors to perform due diligence studies on the investment, one on Buccaneer’s proposal and one of the financial status of the firm. AIDEA expects to have a recommendation from both before its Jan. 12 board meeting. According to AIDEA, the request for funds from Buccaneer might be considerably larger now that the RZF bonds are not part of the deal.

The due diligence efforts will help AIDEA decide whether its participation in the project is a sound business decision.

A significant factor in its decision is Buccaneer’s competition, which will come from Escopeta Oil and Gas, a Houston-based independent that plans to have a jack-up rig in Alaska’s Cook Inlet by April.

Competition from privately funded venture

Aside from State of Alaska exploration and development incentives that are available to all explorers, Escopeta is funding its program using private investment.

The company originally intended to lease a jack-up rig for its prospects in Cook Inlet and, while the rig was under lease, allow other inlet operators to use it. But Escopeta recently announced its intention to buy the rig outright, which would allow it to keep the jack-up in Cook Inlet indefinitely, similar to what Buccaneer proposed before its decision to expand into the Arctic OCS.

Escopeta President Danny Davis told Petroleum News on Dec. 15 that the jack-up, Spartan 151, recently completed drilling in the Gulf of Mexico, and that Escopeta would now begin the modifications needed to make the rig work in Cook Inlet.

Escopeta expects to have Spartan 151 on a heavy-lift vessel bound for Alaska by Feb. 15, in time to begin drilling at its Kitchen Lights unit sometime in mid-April.

Davis is not wasting any time getting his jack-up to Alaska, and for good reason.

The first three companies to drill an offshore well with the same jack-up rig into the relatively unexplored pre-Tertiary strata of Cook Inlet basin receive a special production tax credit. The first explorer will be credited 100 percent of its costs, or up to $25 million; the second, 90 percent, or up to $22.5 million; and the third, 80 percent, or up to $20 million.

If their exploration results in sustained oil and/or gas production, then 50 percent of the credits awarded have to be repaid to the state.

The State of Alaska also offers production tax credits of up to 65 percent for most expenses associated with oil and gas exploration and development in the Cook Inlet basin, on and offshore. Tack on an extra 10 percent for gas exploration. And none of those credits have to be paid back to the state.

Even better, both the jack-up and exploration and development tax credits can be sold back to the state for cash.

—Kay Cashman contributed to this story.

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